Based Upon the "Trade-Off Theory" of Capital Structure,what Differences Might

question 121

Multiple Choice

Based upon the "trade-off theory" of capital structure,what differences might you expect in the capital structure of a food producer and a defense contractor?

• A) Higher debt-equity ratio for food producer.
• B) Higher debt-equity ratio for defense contractor.
• C) Neither firm should use debt in their structure.
• D) Differences in capital structure will make no valuation differences in these firms.

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Definitions:

Accounts Payable Period

The average period it takes for a company to pay off its suppliers, calculated by dividing accounts payable by the average daily purchases.

Operating Cycle

The time period that starts with the purchase of raw materials and ends with the collection of receivables generated from sales, measuring how long it takes for a business to turn expenditures into cash from sales.

Inventory Turnover

A ratio indicating how many times a company has sold and replaced inventory over a specific period, showing efficiency in managing stock.

Cash Cycle

The duration between the outlay of cash for the purchase of inventory and the collection of cash from customers, reflecting the efficiency of a company's cash management.